Cablegate: Nt Dollar Loans to Foreign Borrowers

VZCZCXYZ0000
RR RUEHWEB

DE RUEHIN #3989 3330842
ZNR UUUUU ZZH
R 290842Z NOV 06
FM AIT TAIPEI
TO SECSTATE WASHDC 3228

UNCLAS AIT TAIPEI 003989

SIPDIS

INFO USDOC WASHDC
AMEMBASSY BANGKOK
AMEMBASSY BEIJING
AMEMBASSY SEOUL
AMEMBASSY SINGAPORE
AMEMBASSY TOKYO
AMEMBASSY MANILA
AMEMBASSY JAKARTA
AMEMBASSY KUALA LUMPUR
AMEMBASSY HANOI
AMEMBASSY CANBERRA
AMEMBASSY WELLINGTON
AMCONSUL HONG KONG
AMCONSUL SHANGHAI
AMCONSUL GUANGZHOU
DEPT OF TREASURY WASHDC

SIPDIS, SENSITIVE BUT UNCLASSIFIED

STATE PLEASE PASS AIT/W AND USTR
STATE FOR EAP/TC, EAP/EP
USTR FOR ALTBACH
USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT
TREASURY FOR OASIA/LMOGHTADER
TREASURY PLEASE PASS TO OCC/AMCMAHON
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN

E.O. 12958: N/A
TAGS: EINV EFIN ECON PINR TW
SUBJECT: NT Dollar Loans to Foreign Borrowers

Ref: Taipei 2695

SUMMARY
-------

1. (U) Taiwan's monetary authorities in November started permitting
banking institutions to lend NT Dollars (NTD) to foreign borrowers
in Taiwan which may be used to finance direct investment, securities
trading, and real estate purchases. The new measure relaxes the
conditions for using NTD loans as direct foreign investment
(reported reftel) and is designed to reduce Taiwan's excess
liquidity. End summary.

Industry Regulations
--------------------

2. (U) On November 13, Taiwan's Central Bank of China (CBC) and the
Financial Supervisory Commission (FSC) issued a joint statement that
banking institutions will be permitted to lend NTD to foreign
borrowers without residence in Taiwan after the Bankers Association
adopts a set of voluntary regulations, which it did late November.

Relaxation
----------

3. (U) According to the CBC, qualified foreign borrowers may be
foreign individuals without permanent residence or foreign
corporations without registration in Taiwan. NTD loans to these
foreign borrowers may be used to finance such activities as
securities trading, real estate purchases, direct investment
projects, and acquisition and mergers. These NTD loans must be
secured with collateral, except for intra-day loans which are used
to pay for stocks purchased earlier the same day.

To Reduce Excess Liquidity
--------------------------

4. (U) A CBC official told AIT/T that the new measure is designed
to reduce excess liquidity which has kept yield rates on 10-year
public bonds below 2%, the second lowest in the world after only
Japan. The CBC official said low interest rates in Taiwan should
attract foreign investors to use NTD loans to do merger and
acquisitions (M&A) here. He further noted low interest will also
attract hedge funds to borrow NTD loans to finance securities
transactions. The CBC estimated that NTD loans required annually by
hedge funds and foreign securities firms may reach NT$1.32 trillion
(US$40 billion), equivalent to 90% of total postal savings currently
placed on deposit with the CBC.

COMMENT
-------

5. (SBU) It is unsound to expect hedge funds to resolve domestic
excess liquidity problems. The November 13 relaxation measure
indicates the CBC's desperation to address excess liquidity issues
which have remained in spite of the July 2006 measure permitting
secured NTD loans to serve as foreign direct investment in Taiwan
(reftel). The CBC needs to issue additional negotiable certificates
of deposit to absorb excess liquidity from the banking system. The
best solution would be a substantial expansion of private
consumption and private investment.

Young

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